Page 140 - BusinessStructures & Forms

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
• The gross rental income from the property for the tax year is • Royalties derived by the taxpayer in the ordinary course of a
less than 2% of the smaller of the property's unadjusted basis or trade or business of licensing intangible property.
its FMV. • Amounts included in the gross income of a patron of a
If the corporation sells or exchanges property that is also cooperative by reason of any payment or allocation to the patron
rented during the tax year (in which the gain or loss is based on patronage occurring with respect to a trade or
recognized), the rental is treated as incidental to the activity of business of the patron.
dealing in property if, at the time of the sale or exchange, the • Other income identified by the IRS as income derived by the
property was held primarily for sale to customers in the ordinary taxpayer in the ordinary course of a trade or business.
course of the corporation's trade or business. See Temporary Regulations section 1.469-2T(c)(3) for more
See Temporary Regulations section 1.469-1T(e)(3) and information on portfolio income.
Regulations section 1.469-1(e)(3) for more information on the
definition of rental activities for purposes of the passive activity Report portfolio income and related deductions on
limitations. Schedule K rather than on page 1 of Form 1120-S.
Reporting of rental activities. In reporting the corporation's Self-Charged Interest
income or losses and credits from rental activities, the Certain self-charged interest income and deductions may be
corporation must separately report rental real estate activities treated as passive activity gross income and passive activity
and rental activities other than rental real estate activities. deductions if the loan proceeds are used in a passive activity.
Shareholders who actively participate in a rental real estate Generally, self-charged interest income and deductions result
activity may be able to deduct part or all of their rental real estate from loans between the corporation and its shareholders.
losses (and the deduction equivalent of rental real estate credits) Self-charged interest also occurs in loans between the
against income (or tax) from nonpassive activities. Generally, the corporation and another S corporation or partnership if each
combined amount of rental real estate losses and the deduction owner in the borrowing entity has the same proportional
equivalent of rental real estate credits from all sources (including ownership interest in the lending entity.
rental real estate activities not held through the corporation) that
may be claimed is limited to $25,000. The self-charged interest rules don't apply to a shareholder's
Report rental real estate activity income (loss) on Form 8825 interest in an S corporation if the S corporation makes an
and line 2 of Schedule K and box 2 of Schedule K-1, rather than election under Regulations section 1.469-7(g) to avoid the
on page 1 of Form 1120-S. Report credits related to rental real application of these rules. To make the election, the S
corporation must attach to its original or amended Form 1120-S
estate activities on lines 13c and 13d of Schedule K (box 13, a statement that includes the name, address, EIN of the S
codes E and F, of Schedule K-1) and low-income housing corporation, and a declaration that the election is being made
credits on lines 13a and 13b of Schedule K (box 13, codes C under Regulations section 1.469-7(g). The election will apply to
and D of Schedule K-1). the tax year for which it was made and all subsequent tax years.
Report income (loss) from rental activities other than rental Once made, the election can only be revoked with the consent of
real estate on line 3 of Schedule K and credits related to rental the IRS.
activities other than rental real estate on line 13e of Schedule K
and in box 13, code G, of Schedule K-1. For more details on the self-charged interest rules, see
Regulations section 1.469-7.
Portfolio Income
Generally, portfolio income includes all gross income, other than Grouping Activities
income derived in the ordinary course of a trade or business, Generally, one or more trade or business or rental activities may
that is attributable to interest; dividends; royalties; income from a be treated as a single activity if the activities make up an
real estate investment trust, a regulated investment company, a appropriate economic unit for measurement of gain or loss under
real estate mortgage investment conduit, a common trust fund, a the passive activity rules. Whether activities make up an
controlled foreign corporation, a qualified electing fund, or a appropriate economic unit depends on all the relevant facts and
cooperative; income from the disposition of property that circumstances. The factors given the greatest weight in
produces income of a type defined as portfolio income; and determining whether activities make up an appropriate economic
income from the disposition of property held for investment. See unit are:
Self-Charged Interest, later, for an exception. • Similarities and differences in types of trades or businesses,
• The extent of common control,
Solely for purposes of the preceding paragraph, gross • The extent of common ownership,
income derived in the ordinary course of a trade or business • Geographical location, and
includes (and portfolio income, therefore, doesn't include) the • Reliance between or among the activities.
following types of income. Example. The corporation has a significant ownership
• Interest income on loans and investments made in the interest in a bakery and a movie theater in Baltimore and a
ordinary course of a trade or business of lending money. bakery and a movie theater in Philadelphia. Depending on the
• Interest on accounts receivable arising from the performance relevant facts and circumstances, there may be more than one
of services or the sale of property in the ordinary course of a reasonable method for grouping the corporation's activities. For
trade or business of performing such services or selling such instance, the following groupings may or may not be permissible.
property, but only if credit is customarily offered to customers of • A single activity.
the business. • A movie theater activity and a bakery activity.
• Income from investments made in the ordinary course of a • A Baltimore activity and a Philadelphia activity.
trade or business of furnishing insurance or annuity contracts or • Four separate activities.
reinsuring risks underwritten by insurance companies.
• Income or gain derived in the ordinary course of an activity of Once the corporation chooses a grouping under these rules,
trading or dealing in any property if such activity constitutes a it must continue using that grouping in later tax years unless
trade or business (unless the dealer held the property for either:
investment at any time before such income or gain is • The corporation determines that the original grouping was
recognized). clearly inappropriate, or

-10- Instructions for Form 1120-S (2022)